Vládní úspory v Itálii (dokument v AJ)

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European Economics

Summer madness

The ECB sounded cautious about its monetary policy stance. It was not

going to be rushed into reversing its hikes and todays message was that

rates are on hold, although the bias of risk is on the downside.

President Trichet thought it was important to remind us that the monetary

policy stance remains accommodative, so much so that the inflation forecast

remained unchanged. However, he also stressed that the risks to the

economic outlook are on the downside and remarked that the environment

was of particularly high uncertainty. This was a departure from last monthsstatement, which concluded that risks to growth remained broadly balanced.

An interesting feature was the quasi-acknowledgement of the carrot and

stick approach that the ECB is pursuing. In response to a question on Italy,

President Trichet admitted that messages had been sent to the Italian

government and that there had been some complexities. PM Berlusconi

backtracked on some of the promised measures and the ECB stopped

purchasing Italian bonds for a few days, as a result. However, for the time

being, there has been a happy ending. These complexities had been resolved,

something extremely important for the Governing Council and the ECB has

been in the market buying Italian bonds again since Wednesday. The message

could not be clearer: ECB bond purchases come in exchange for

remaining on the path of fiscal austerity.What displeased the Governing Council was the Italian government

backtracking on its first commitment, the austerity measures presented in

mid-August. However, after a serious flip-flopping of the government, the Senate

approved additional austerity measures to stabilise the Italian deficit by 2013 and

the Lower Houses vote is scheduled for mid next week.

The Italian fiscal package is large and should be sufficient, if fully

implemented, to get close to a balanced budget by 2013. There are, of

course, several risks.

Growth projections appear too optimistic and could imply a somewhat larger

deficit than projected and there are also implementation risks. Political risk

remains. Although our central scenario is that the current government will try to

stay in place until 2013, other outcomes are clearly possible and not all may be

market-friendly. A rating downgrade is a distinct possibility in the short term and

we believe the government missed an opportunity to tackle Italys structural issues

more aggressively. Finally, the ECB itself constitutes a risk, but in both directions.

For the moment, President Trichet sounds satisfied but it goes without saying that

any signs of backtracking from the ECB on the SMP could have dire

consequences for confidence and for growth and deficit/debt dynamics.

08 September 2011

Economics Research

http://www.credit-suisse.com/researchandanalytics

Research Analysts

Christel Aranda-Hassel

+44 20 7888 1383

[email protected]

Violante Di Canossa

+44 20 7883 4192

[email protected]

Neville Hill

+44 20 7888 1334

[email protected]

Axel Lang

+44 20 7883 3738

[email protected]

Giovanni Zanni

+33 1 7039 0132

[email protected]


2/9

08 September 2011

European Economics 2

Summer Madness

After serious flip-flopping over the past three weeks, the Italian government

presented its final version of the additional austerity measures required to stabilise

Italian finances. The package was voted by the Senate on Wednesday night and it is due

to be voted mid next week by the Lower House. We expect a positive outcome there as

well, given the likely strongly negative consequences that a no vote would entail.

Putting together the impact from the July measures, which we commented upon in a

previous publication (Italy under attack, 12/7/11), and the August enhancements , the

austerity package amounts to a total of 60bn (3.8% of GDP) between 2011 and 2014,

with the largest impact evenly distributed on 2012 and 2013. Note also that measures

already voted last year, with an impact on 2012 (as implied by the reduction in the pre-

existing Stability and Growth Programs trend deficit, as shown in Exhibit 1), should also

contribute to the fiscal effort.

Overall, the additional measures voted this week increase the size of the July package

(which was worth 40bn) and front-load the adjustment to 2012-3, after the negative

market reaction to the first package and written requests from the ECB to do more.

The new measures aim at balancing the budget in 2013 , rather than in 2014, as

previously envisaged. From this years 3.8% of GDP, we forecast the deficit should fall to1.3% next year and reach a surplus of 0.2% in 2013.

Exhibit 1: General government deficit projectionsAs % of GDP

2011 2012 2013 2014

Stability and Growth Pact (SGP) 3.9 2.7 2.7 2.6

Impact of July package -0.1 -0.3 -1.4 -2.7

Impact of August package -- -1.1 -1.5 -0.4

SGP+ July & Aug packages 3.8 1.3 -0.2 -0.5

Source: Senato,it, Credit Suisse

The key measures of the combined package are heavily reliant on funding from therevenue side. These include an increase in VAT to 21% from 20%; an increase in the

capital gain tax rate to 20% from 12.5% - government securities are excluded and their tax

rate remains at 12.5%; cuts in tax incentives and benefits; and a higher Robin Hood tax

rate on energy companies (to 10.5% from 6.5%). On the spending side, the main items are

deeper cuts to funds to ministries and to the local administration and deeper cuts on public

employees costs.

These measures come on top of what voted in July: cuts to transfers to local governments,

to healthcare expenditures, to current expenditures at the central government level;

contribution from high pension benefits earners; a tax on securities accounts and an

additional tax on banks and insurance companies.


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08 September 2011


Exhibit 2: The combined July and August fiscal austerity package bn

2011 2012 2013 2014

Extra revenues 3.0 20.5 35.3 39.2

tax on securities accounts 0.7 1.3 3.8 2.5

games and lotteries 0.4 0.5 0.5 0.5

tax on fuel/tobacco 0.0 5.4 3.5 3.5

tax on banks and insurances 0.0 0.9 0.5 0.5

cut to tax incentives and benefits 0.0 4.0 12.0 20

capital gain tax 0.0 1.4 1.5 1.9

tax evasion 0.0 0.4 1.2 1.2

solidarity contribution for incomes above 300k 0.0 0.1 0.1 0.1

VAT hike 0.7 4.2 4.2 4.2

health ticket and pension savings 0.0 0.4 3.2 5.7

Other 1.2 12.7 11.7 6.1

Lower spending -0.1 7.6 18.8 20.4

health sector 0.0 0.0 2.5 5.0

funds to local administration -0.4 3.8 6.7 7.4

Pension 0.0 0.7 1.5 1.6

civil servants 0.0 0.0 0.0 0.6

funds to ministries 0.1 7.7 6.9 6.0

Other 0.2 -4.6 1.2 -0.1

Total 3.0 28.1 54.2 59.7

Source: lavoce.info, Credit Suisse

The prospective fiscal adjustment on the back of these measures is large and

should bring down Italys deficit at least close to a balanced budget by 2013.

However, there are several risks and potential flaws, in our view. On the positive side,

the government has presented and approved a draft law to introduce the golden rule

from 2014 on public finances in the Constitution.1) We believe that the government could have taken the opportunity of this crisis

to address more incisively Italys historical problems. A wealth tax to cut the debt

stock could have been considered, for example. Measures to foster growth also

appear insufficient, with some backtracking on the initial liberalization package.

Deeper expenditure cuts should be also considered. In this respect, the spending

review, to be completed by the end of November, is important and may result in

further expenditure cuts. Constitutional laws to halve the number of MPs and to

eliminate the Province, a middle level of local administration, saving around 2bn, are

being drafted. However, given the long Parliamentary iter, it will take time for them to

be approved.

2) Growth projections need to be revised down significantly and could imply a

somewhat larger deficit than projected. That being said, there are some marginsbuilt in the package, as the total amount is larger than required to reach the official

targets, with a lead. Possible extra funding from the spending review, as mentioned

above, missing funds from a 2002 tax amnesty and further saving from pensions are

not accounted for in the current package. Moreover, the 2013 and 2014 targets are

slightly better than balance (a surplus of 0.2 and 0.5, respectively), providing a further

cushion to the pledge of reaching a balanced budget by 2013. In particular, we view

the latest additions of this week (mainly the 1pp VAT hike) as a way to cover uncertain

funding from some tax evasion measures and also some slippage due to lower than

initially projected GDP growth.


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08 September 2011


At the time of writing, we still do not have new official growth projections. The

governments assumptions are still the same ones presented in April. As Exhibit 3 shows,

these forecasts appear too high, in light of the confidence shock of recent months and the

negative impact on GDP growth expected in 2012-13 in particular as a consequence of the

fiscal retrenchment. Our central scenario for Italian growth next year is currently zero.

Exhibit 3: GDP growth projections

%

2011 2012 2013 2014

Government (SGP) 1.1 1.3 1.5 1.6

Credit Suisse 0.7 0.0 -- --

Source: Tesoro, Credit Suisse

3) Despite the positive vote, political risk remains. The government coalition is fragile

(Exhibit 4) and many in the opposition are calling for early elections and/or an interim,

or technical, government. Although our central scenario is that the current

government will try to stay in place until 2013, other outcomes are clearly possible.

We would view a technical government as potentially positive for confidence, while

early elections could open a phase of uncertainty that could be detrimental for the

economy in the current situation, we believe. Fundamentally, however, we dont thinkthat a change of majority would put into question the fiscal targets agreed with Europe.

Exhibit 4: Government coalition is losing ground

Opinion polls, %

28

30

32

34

36

38

40

42

44

46

48

08

elections

09 EU

elections

Sep-10 Nov-10 Dec-10 Feb-11 Jun-11 Sep-11

Centre-right coalition

Centre-left coalition

Source: http://www.sondaggipoliticoelettorali.it, Credit Suisse

4) A rating downgrade is a distinct possibility. Despite the passage of the fiscal

measures, growth prospects are poor and the political situation uncertain. Flip-floppinghas not helped either. A likely downgrade may aggravate the situation in the short

term. However, as we have written before, while most euro area countries are

planning to stabilise their debt ratio by 2013-4, Italy has moved to phase two, which

aims at consolidating the debt adjustment by putting its debt dynamic on a structural

decreasing path. As such, we believe that Italy is essentially advanced on the

adjustment path. We provide below a chartbook on several indicators of the fiscal and

economic health of the country.
http://www.sondaggipoliticoelettorali.it/http://www.sondaggipoliticoelettorali.it/http://www.sondaggipoliticoelettorali.it/http://www.sondaggipoliticoelettorali.it/


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08 September 2011


5) ECB (in)action: risks are in both directions. We believe this package should be

more palatable to the ECB, relative to what the government had put together until last

week. ECB President Trichet sounded satisfied by the Italian government confirming

its firts commitments, something extremely important for the ECB Executive Board.

Clearly, any signs of backtracking from the ECB on the SMP program could have dire

consequences for confidence and for growth and deficit/debt dynamics. For now,

current interest rates are broadly consistent with what the government had in its

assumptions for this year. Long-term rates are expected to average 5.0% this yearand rise to 5.3% next year (and to 6.0% by 2014).

Exhibit 5: Italian 10- year bond yields

4.4

4.8

5.2

5.6

6.0

6.4

Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11

7 Aug: ECB SMP

announcement

Government presents

additional measures

Governmet backtracks

Back to 1st

commitments

Source: Credit Suisse, Thomson Reuters Datastream


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08 September 2011


Chartbook

Exhibit 6: Growth and cyclical indicators Exhibit 7: Industrial production momentum

26

30

34

38

42

46

50

54

58

62

66

98 99 00 01 02 03 04 05 06 07 08 09 10 11

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Composite PMI, lhs

GDP, 2q ma, rhs

-12

-10

-8

-6

-4

-20

2

4

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Exhibit 8: Employment growth Exhibit 9: Exports growth

y/y % y/y %

-3

-2

-1

0

1

2

3

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

-35

-25

-15

-5

5

15

25

35

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Exports to EU27

Exports to non EU27

Exhibit 10: Trade balance Exhibit 11: Current account balance

bn As % of GDP

-50

-40

-30

-20-10

0

10

20

30

40

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

-5

-4

-3

-2-1

0

1

2

3

4

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Source: Credit Suisse Source: Credit Suisse


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08 September 2011


Exhibit 12: Government net lending Exhibit 13: Government deficit bn, 12 month running total As % of GDP; Italian government and EC estimates

-100

-90

-80

-70

-60

-50

-40-30

-20

-10

0

97 98 99 00 01 02 03 04 05 06 07 08 09 10 110

1

2

3

4

5

6

7

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Euro area Italy

Exhibit 14: Primary balance Exhibit 15: Government debt

As % of GDP; Italian government estimates As % of GDP; EC estimates

-1

0

1

2

3

4

5

6

7

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1260

70

80

90

100

110

120

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Source: Credit Suisse, Thomson Reuters Datastream, NTC Economics, European Commission, Italian Treasury


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FIXED INCOME RESEARCH > ECONOMICS RESEARCH > DEVELOPED COUNTRIES

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Global Head of Fixed Income and Economic Research

+1 212 538 6480

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Christel Aranda-Hassel, Director

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Neville Hill, Director


Giovanni Zanni, Director

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Axel Lang, Analyst


Steven Bryce, Analyst


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